Opinion
Civ. 1443.
September 27, 1978. Rehearing Denied November 1, 1978.
Appeal from the Circuit Court, Madison County, S.A. Watson, Jr., J.
George C. Cocoris, General Counsel, State of Alabama, Dept. of Industrial Relations, Legal Division, Montgomery, for appellant.
Forrest D. Herrington, Huntsville, for appellee.
Taxpayer, Gibson's Barbecue, Inc., an employer under the unemployment compensation law was assessed an increased rate of contribution by the Department of Industrial Relations of the State of Alabama as a successor employer under § 25-4-54 (i), Code of Alabama (1975). After denial of administrative relief, taxpayer appealed to the circuit court. The circuit court, construing § 25-4-8 (a)(4)a, Code of Alabama (1975), found as a fact that taxpayer was not a successor employer and reversed the assessment of the department.
The facts from which this matter arose were materially as follows: David Gibson and Beatrice Gibson had operated a barbecue take out business in Huntsville for many years prior to March 1976. The business account with the state unemployment compensation fund was in the name of "David Gibson's Barbecue No. 1." Its employment record was not good and its rate of contribution to the compensation fund was high. Jessie Sanford and John Hampton, as partners had also been in the barbecue business in Huntsville for many years. They had incorporated their business in 1975 as Gibson's Barbecue, Inc., each owning fifty percent of the stock. Gibson's Barbecue, Inc. had an excellent employment experience with the Department and thus a low contribution rate.
On March 9, 1976, Sanford and Hampton, as partners, entered into a contract with David and Beatrice Gibson to purchase the property, inventory and equipment of David Gibson's Barbecue No. 1 as of April 1, 1976. The Gibsons agreed not to compete in the barbecue business in Huntsville for a period of ten years except for the continued operation of David Gibson's Barbecue No. 2 at another location.
Sanford and Hampton, as partners then executed a lease of the real estate purchased to Gibson's Barbecue, Inc. for a term of five years beginning April 1, 1976. On April 1, Gibson's Barbecue, Inc. took possession of the premises and operation of David Gibson's Barbecue No. 1. It also received transfer of the equipment and inventory. There was no interruption of business. Six of the regular employees remained on the job. Only the management changed. In a few days, the public name of the business was changed to Gibson's Barbecue, Inc.
The Department combined the benefit wage record of Gibson's Barbecue, Inc. with the benefit wage record of David Gibson's Barbecue No. 1 for the years 1974, 1975 and 1976 to calculate the contribution rate for Gibson's Barbecue, Inc. for the year 1977. The combining of the poor experience of the old business with the excellent experience of Gibson's, Inc. resulted in a large increase in the rate.
The only issue presented is whether the trial court erred in finding that Gibson's Barbecue, Inc. was not, in fact, a successor employer to David Gibson's Barbecue No. 1 under the statute.
Section 25-4-8 (a)(4)a provides inter alia as follows:
"(a) `Employer' as used in this chapter shall mean:
"(4) Any employing unit (whether or not an employing unit at the time of acquisition) which:
"a. Acquired the organization, trade, or business, or substantially all the assets thereof, of another employing unit which at the time of such acquisition was an employer subject to this chapter."
The trial court stated in its judgment the following:
"That sufficiently different methods of dealing with employees as well as operating the business were employed by the plaintiff to warrant a determination by the court that an entirely new operation was commenced rather than the assumption of control of a previous operation."
We are uncertain of the meaning of this statement. It appears the court concluded that if the new owner inaugurated business and management practices after taking over that were different from those of the former owner, it was not a successor employer under the statute. We are unable to accept that conclusion. If the statement of the court means that it concluded that the "organization" of the prior employer was not "acquired" within the meaning of the statute, we agree. Six of the former employees were retained by the new owner. However, none of those were management. It has been said that the management component of the business is the "vital, integral parts required for continued operation." Michigan Employment Sec. Comm'n v. Arrow Plating Co., 10 Mich. App. 323, 159 N.W.2d 378 (1968).
It may be further said that there is insufficient evidence that the "trade or business" of the prior owner was acquired. Though the new owner continued to sell barbecue at the same location, using some of the same employees, the same equipment, and for a while, the same name, and offered its product and service to the general public as did its predecessor, such is not proof of acquiring the "trade or business." Within the context of the statute, acquiring the "trade or business" implies a transferral of a specific market or clientele from the former to the new. Grand Rapids Dry Goods Co. v. Michigan Employment Sec. Comm'n, 348 Mich. 177, 82 N.W.2d 479 (1957); Michigan Employment Sec. Comm'n v. Arrow Plating Co., supra.
It is further indicated that the trial court based its conclusion upon a finding that Gibson's Barbecue, Inc. was not a successor employer because it did not "directly" acquire substantially all of the assets of David Gibson's Barbecue No. 1. Gibson's submits this point upon the authority of the case of Pariseau Corporation v. State, 102 N.H. 364, 156 A.2d 753 (1959).
Pariseau was a case in which a corporation was claiming to be a successor employer so that it could secure the benefit of a favorable contribution rate held by the former owner. Our case involves an attempt to avoid an unfavorable rate by claiming not to be a successor employer. In Pariseau the contract for purchase of partial assets of a business was made by one corporation. The contract was assigned on the same day to another corporation, Pariseau, wholly owned by the first corporation and organized for the purpose of operating the business purchased. Pariseau contended the making of the contract to purchase by the parent corporation and the subsequent forming of a new corporation and assignment of the contract were merely procedural steps and it was, in fact, a successor corporation. The court found from the evidence that the first purchasing corporation had, in fact, operated the business purchased from opening in the morning until 2:00 P.M., before the Pariseau corporation was formed and the assignment made to it. Thus, there was no direct transfer of assets to Pariseau from the employing unit with the favorable rate, but rather the original purchaser had become an employing unit while it owned and operated the business for the few hours. Therefore, Pariseau did not directly acquire from the original owner. It is not necessary that we agree or disagree with the conclusion of Pariseau, for it is clearly distinguishable on its facts.
In this case, though the contract of purchase was made by a partnership, there is no evidence that the partnership ever became an employing unit by operating the business even for a few hours as in Pariseau. The evidence is explicit that the lease was executed between the partnership and Gibson's, Inc. and other arrangements for transfer of assets and employees made prior to April 1, 1976. The operation of the business and transfer of possession was from David Gibson's Barbecue No. 1 to Gibson's Barbecue, Inc. as of the opening for business on April 1. There was no hiatus for change of operation or possession. The employees were employees of David Gibson's Barbecue No. 1 on March 31 and employees of Gibson's Barbecue, Inc. on April 1. The partnership was not an intervening employing unit. We believe the statute requires only a succession of employing units through the acquisition of substantially all of the assets. Gibson's Barbecue, Inc. acquired substantially all of the assets of David Gibson's Barbecue No. 1 by lease of the property and transfer or sale of equipment and inventory from the partnership. At the time of the acquisition, April 1, 1976, David Gibson's Barbecue No. 1 was an employer subject to the statute. The acquisition of ownership may be said to be procedurally indirect, but the succession of both ownership and operation was, in fact, direct and simultaneous. To hold otherwise would be to permit avoidance of the purpose of the statute.
We do not consider the fact that Gibson's Barbecue, Inc. acquired substantially all of the assets by lease rather than purchase to affect the application of the statute. One can acquire assets of a business through a leasehold interest. Sea Crest Hotel, Inc. v. Director of Division of Employ. Sec., 330 Mass. 226, 112 N.E.2d 813 (1953); Chief Freight Lines Co. v. Industrial Comm'n, 366 S.W.2d 48 (Mo.App. 1963).
It is the judgment of the court that the trial court erred in applying the law to the facts and its judgment is erroneous and must be reversed.
REVERSED AND RENDERED.
BRADLEY, J., concurs.
HOLMES, J., dissents.
I respectfully dissent. The trial court found the taxpayer was not subject to the tax rate the State sought to impose upon him. I agree that the taxpayer is not subject to the tax rate the State seeks to impose upon him under § 25-4-54 (i).
The majority opinion reaches an unfortunate result in that it unreasonably burdens the taxpayer with a tax rate which is not warranted by the facts, and it is contrary to the policies which underpin the unemployment system of this state.
Without reiterating the circumstances of this case, there is a fact of vital importance worthy of mention. Gibson's Barbecue, Inc., as taxpayer, has maintained an excellent benefit wage record (experience rating) over an extended period of time in the past. This is clearly indicated by the record and, in fact, the State does not contend to the contrary. Given this fact, we do not have a situation before us in which a successor employer seeks to circumvent the spirit of §§ 25-4-54 (i), and 25-4-8 (a)4 (a), Code of Ala. 1975, by attempting to acquire the favorable tax treatment of a former employer, even though the successor would not himself be entitled to such favorable treatment. See, e.g., Annot., 22 A.L.R.2d 673 (1950). Nor do we have a situation in which a taxpayer is attempting to avoid payment of delinquent taxes; in fact, the taxpayer instituted this action in an effort to determine his reasonable tax rate prior to any assessment. The action became necessary because the State seeks, in large part, to impose the experience rating of the taxpayer's predecessor upon the taxpayer, notwithstanding the fact that they had granted the taxpayer a favorable rate in years past.
To facilitate the discussion of my objections to the majority's holding, a brief digression to the objectives of Alabama unemployment compensation system is appropriate.
The objectives of the unemployment tax are two: To prevent unemployment by inducing employers to stabilize their operations and to fund the payment of benefits for the unemployment that remains. Brandeis, The Employer Reserve Type of Unemployment Compensation Law, 3 Law Contemp. Prob. 54, 56 (1936). The experience rating is the means employed by the State to accomplish these two ends. That is, the taxpayer has an incentive to reduce the incidence of his tax by reducing unemployment in his business while, at the same time, the rate of tax assessed against him is calculated to fund the system based upon a computation of the risk that his employees will become jobless. The tax must, of necessity, be differential in order to be an incentive and, accordingly, it is increased or decreased based on an analysis of the history of the employer's employment stability.
Since the tax rate is differential, an employer is entitled to factually demonstrate he is entitled to a reduced rate of contribution based on an analysis of his "experience" with respect to unemployment or other factors bearing a direct relation to the unemployment risk. A. Arnold, Experience Rating, 55 Yale L.J. 218, 231 (1945). In order for the system to operate fairly to both employer and employee and achieve its objectives:
"[T]he measure that is used . . . [to calculate the experience rating] ought necessarily to reflect each employer's performance in terms of the cost of unemployment which he places upon the fund, or of his performance in stabilizing his employment. . . ." [Emphasis supplied.]
Clearly, what is required is a balancing of interests. If the rate assessed is insufficient to cover the risk, then the system is inadequately funded; on the other hand, if the rate is greater than that necessary to meet the risk, the tax is no longer an incentive and becomes an unreasonable burden on the businessman.
In this instance, the State's assessment serves as a penalty on the taxpayer. This is to be avoided as the court in Pariseau Corp. v. State, 102 N.H. 364, 156 A.2d 753 (1959), aptly noted:
"[I]t is considered advisable to reward an employer with good employment records by giving him a favorable rating and thereby reducing his payment. . . ." Id. 156 A.2d at 756.
Given the fact that the system seeks to balance the interest of both employer and employee, the State is precluded from assessing a rate which does not serve the ends of the system. Here, the State has chosen a rate which punishes rather than rewards and for this reason alone the tax rate assessed is unreasonable.
More importantly, the State's calculation of the experience rating here bears no reasonable relationship to unemployment or other factors bearing a direct relationship to the risk of unemployment. That the tax rate must directly relate to the risk is demonstrated by the language in § 1602 of the Internal Revenue Code of 1939, which provides in part:
"[N]o reduced rate of contributions . . is permitted to a person . . . having individuals in his . . . employ except on the basis of his . . . experience with respect to unemployment or other factors bearing a direct relation to unemployment risk. . . ." 26 U.S.C.A. § 3303 (a)(1) 1970. [Emphasis supplied.]
The mere fact that there has been a transfer of a business to a successor does not make the requirement that there be a factual basis to support the experience rating any less compelling. When the experience of the successor is likely to be that of his successor, his contribution should be that of his predecessor. See, e.g., Note, 60 Harvard L.Rev. 276, 277 (1946). Conversely, when the successor's experience rating is likely to be much better than his predecessor, there is no factual basis to assign the predecessor's rating to the successor. George v. Unemployment Comm'n, 3 Terry 558, 41 A.2d 465 (Del.Super.Ct. 1945). As the court in George, supra, noted:
"Again, let it be supposed that the firm had a poor experience record of employment with a rate of three per centum or more, . . . and upon . . . [transfer], the survivor continued to operate as before, it would be a harsh ruling to fasten the penalty on the successor." Id. 41 A.2d at 468.
Here, the State has ignored the experience rating it previously assigned to the taxpayer and the facts upon which it calculated that rate. I believe the State now seeks to arbitrarily assign a rating based on another's poor performance and this is both logically and factually impermissible.
The scope of the effect of the majority's decision goes much further than its effect upon the instant taxpayer. As noted above, the first of the two goals of the system is to stimulate the reduction of unemployment by offering a tax rate decrease when the businessman demonstrates his intention and ability to sustain employment in his firm. The majority's decision places this objective in jeopardy since it discourages the public policy in Alabama of encouraging job expansion. As stated in E. Schmidt, Experience Rating and Unemployment Compensation, 55 Yale L.J. 242 (1945):
"A tax upon the employer measured by payrolls is one of the worst types of taxes in terms of encouraging job expansion. The higher the wages, the higher the tax; The greater the number of workers, the greater the tax; every wage increase means a higher payroll tax; every worker added to the payroll means an extra tax. It is under experience rating coupled with effective employment stabilization that the employer's incentive to avoid the payroll tax is reduced, because the employer may qualify for a reduced . . . rate . . ." Id. at 246-47.
Another advantage accrues when the system of ratings operates as it should. Where payroll taxes are minimized as a consequence of the employer's concerted effort to keep his employees on the job, the tax savings which result serve to facilitate business expansion. This expansion can be expected to contribute to a reduction in short term unemployment and cyclical unemployment as well. Id. at 250. Where, as here, the State assigns the taxpayer the poor rating of his predecessor, the economic advantages which the system seeks to foster are jeopardized.
For the foregoing reasons, I would hold that, in this case, as the trial court did, that the taxpayer is not within the application of § 25-4-54 (i), Code of Ala. 1975, and therefore, he should be assessed the favorable experience rating to which he has demonstrated he is entitled. The purpose of the statute would be fulfilled by so holding and, therefore, I would affirm the trial court's action.